HDFC, Axis Bank, Sintex

STOCK UPDATE 

Housing Development Finance Corporation
Recommendation: Hold
Price target: Under review
Current market price: Rs2,758

Q2FY2010 results: First-cut analysis

Result highlights

• Housing Development Finance Corporation (HDFC) reported a bottom line of Rs663.9 crore for Q2FY2010, indicating a 24.3% year-on-year (y-o-y) growth. The bottom line is above our expectation of Rs611 crore primarily due to higher than expected other operating income and capital gains.
• The net interest income (NII) came in at Rs736.4 crore, which was largely flattish (down 1.3% year on year [yoy]). The top line performance was weaker primarily due to a sharper than expected y-o-y contraction in the net interest margin (NIM).
• The calculated NIM for the quarter stood at 2.92%, indicating a contraction of ~50 basis points yoy. The contraction in the NIM, despite a 94-basis-point y-o-y decline in the cost of funds, was the result of a sharp drop in the yields on loans due to recent rate cuts. 
• The other operating income witnessed a spike and stood at Rs210.7 crore, helped by a robust increase in the surplus from the deployment in mutual funds, the fee income and the dividend income. 
• In line, the cost-to-income ratio improved to 8.1% in the quarter from 9.6% in the year-ago quarter. Further, the growth in the operating expenses was flattish during the quarter, thereby leading to a respectable 19.4% y-o-y growth in the operating profit. More importantly, the core operating profit growth was much weaker at ~15% yoy.
• The approvals and disbursals grew by 11.8% yoy and 29% yoy respectively in Q2FY2010. Importantly, the disbursal growth improved significantly from 20.6% yoy in the previous quarter. Sequentially, the incremental loan mix growth was driven by returning demand in the individual segment. 
• The demand environment for the residential mortgage space has witnessed some improvement recently as a result of low property prices and attractive financing rates. However, HDFC continues to face stiff competition from public sector banks in the space. 
• The asset quality situation at the end of Q2FY2010 remains quite comfortable with the non-performing loans (+90 days overdue) at 0.95% and +6 months overdue loans at 0.6%. More importantly, the asset quality showed an improvement on a sequential basis in percentage terms. 
• At the current market price of Rs2,758, the stock trades at 24.4x FY2011E earnings per share (EPS) and 4.7x FY2011E book value per share. In view of further pick-up in residential purchase inquires as well as eventual purchases, we would be revisiting our assumptions and follow up with a detailed note soon.

Axis Bank
Recommendation: Hold
Price target: Rs1,107
Current market price: Rs1,013

Q2FY2010 results: First-cut analysis

Result highlights

• For Q2FY2010 Axis Bank has reported a net profit of Rs531.6 crore, indicating an increase of 31.9% year on year (yoy). The profit growth is largely in line with our estimate. The top line growth too is in line with our expectations. However, a higher than expected increase in the treasury gains was largely offset by a spike in the loan loss provisions made during the quarter. This restricted the overall bottom line growth for the quarter. For H1FY2010, the net profit of the bank grew by a strong 49.2% yoy to Rs1,093.7 crore. 
• The net interest income (NII) grew by 25.9% yoy and by 10% quarter on quarter (qoq) to Rs1,149.7 crore led by an 18-basis-point sequential improvement in the net interest margin to 3.52%. However, the NII remained flat yoy. Moreover, a healthy ~320-basis-point y-o-y increase in the deployment rate also supported a higher growth in the NII despite a limited (up 17.7% yoy) growth in the advances. 
• The non-interest income during the quarter increased by a robust 53.5% yoy to Rs1,065.6 crore on account of a multi-fold increase in the treasury gains during the quarter. However, the growth in the core fee income remained subdued at 14.7% yoy on account of a lower income from third party distribution of products. 
• The operating expenses grew by 24% yoy and by 10% qoq on account of a higher 28% increase yoy in the other operating expenses. During the quarter the bank added 55 new branches and 143 new ATMs, resulting in higher operating expenses. However, a sharp increase in the treasury gains kept the cost-to-income ratio contained at ~41% levels. 
• The provisioning expenses almost doubled to Rs498.9 crore in Q2FY2010, as the bank made ad hoc provisions for loan losses with a view to improving its provision cover. As a result, the provision coverage ratio improved to 63.2% from 59.9% in the previous quarter. 
• The asset quality of the bank deteriorated meaningfully as the gross non-performing assets (NPAs) increased by 59.4% yoy and by 23.6% qoq to Rs1,131.7 crore during Q2FY2010. The sharp increase in the gross NPAs was on the back of the higher delinquencies seen across segments. Moreover, the management indicated that slippages seen in some of the restructured assets too led to the increase in the gross NPAs. In relative terms, the % gross NPAs increased to 1.21% from 1.01% in the previous quarter. However, due to improved provision cover the % net NPAs remained largely flat on a sequential basis at ~0.45%. 
• During the quarter the bank restructured assets worth Rs390 crore, 80% of which are large and mid-sized corporate accounts, while the small and medium enterprises, and agri segments constituted around 12% and 8% of the restructured loans respectively. However, on a cumulative basis the overall restructured assets stood reduced at Rs2,363 crore as compared with Rs2,520 crore in Q1FY2010, as certain restructured accounts either got upgraded or slipped to the non-performing category during the quarter. 
• The business growth remained subdued during the quarter, as the advances grew by 17.7% yoy to Rs81,044 crore while the deposits grew by just 12.4% yoy to Rs115,599 crore. While the agri portfolio expanded strongly by 38% yoy, the large and mid-sized corporate, and retail portfolios grew at a slower pace of 18.5% and 7.2% respectively. Notably, the demand deposits grew by 19.4% yoy, resulting in an over 250-basis-point both year-on-year and sequential improvement in the current account and savings account ratio to 42.8%. 
• During Q2FY2010, the bank raised additional equity capital (Rs3,767 crore net of issue related expenses) by undertaking a qualified institutional placement, global depository receipt issue and preferential allotment of shares. As a result, the capital adequacy ratio of the bank improved to 16.47% (from 15.28% in Q1FY2010). Importantly, after the fund raising activity the tier-I capital ratio has now improved to 11.43% from 9.39% in the previous quarter. 
• At the current market price of Rs1,013, the stock trades at 13.4x its FY2011E earnings per share and 2.5x its FY2011E adjusted book value. We maintain our Hold recommendation on the stock and shall return soon with a detailed analysis of the bank?s Q2FY2010 performance.

Sintex Industries
Recommendation: Buy
Price target: Rs288
Current market price: Rs249

Price target revised to Rs288

Result highlights

• Sintex Industries (Sintex)? Q2FY2010 performance was lower than our expectations on account of lower than expected sales and higher than anticipated interest and depreciation expenses. The adjusted profit after tax (PAT) was down by 22.4% year on year (yoy).
• The company?s net income from operations declined marginally by 1.2% to Rs711.2 crore in the quarter primarily due to lower commodity prices that was partially offset by growth in the volumes. 
• The operating profit margin (OPM) improved by 112 basis points to 17.8% (in line with our estimate of 11.7%) led by a decline in the other expenses as a percentage of sales (which was down by 213 basis points). However, the raw material cost as a percentage of sales increased by 50 basis points. Consequently, the company?s operating profit increased by 5.4% to Rs126.4 crore.
• On a segmental basis, the textile division?s profitability was severely impacted by under-utilisation of the plants resulting into a 1,239-basis-point contraction in the profit before interest and tax (PBIT) margin to 3.8% during the quarter. The revenues of the division declined by 14.1% to Rs76.2 crore. The plastic division?s revenues reported a marginal decline of 0.9% yoy to Rs639.2 crore as the 15% growth in the volumes was largely offset by the decline in the realisations. 
• Despite the increase in the operating profit and a 16% year-on-year (y-o-y) decline in the interest cost, the company?s adjusted net profit after tax (PAT) declined by 22.4% yoy to Rs65 crore. This was mainly due to a steep decline of 75.2% yoy in the other income (due to revaluation of foreign currency convertible bonds [FCCBs] resulting in marked to market [MTM] losses and a lower other operating income especially from BT shelter) and higher depreciation expenses. Adjusting for the extraordinary item of Rs6.8 crore related to write-off of technical know-how fee for under-ground water tanks, the company?s reported PAT stood at Rs57.2 crore. 
• As far as subsidiaries are concerned, Zeppelin Mobile and Bright Brothers reported strong performance during the quarter. The revenues from Zeppelin Mobile more than doubled (+136.2% yoy) though on a low base and its earnings before interest, tax, depreciation and amortisation (EBITDA) margin stood at 16.8% during the quarter. Bright Brothers? revenues grew by 35.3% yoy in Q2FY2010. Wasaukee Composites? operating margin of 12% has surprised positively for two consecutive quarters. Neif Plastics? revenues declined by 5.8%.
• In terms of outlook, Sintex? management expects the plastic segment (prefab, monolithic and custom building businesses) to drive the company?s growth in the near to medium term. The company has a pending order book of Rs1,800 crore from its monolithic business executable over the next 18-20 month period. The company expects the top-line growth to be in the range of 5-10% and the bottom line to expand by 15% in FY2010 on a y-o-y basis. Further, the subsidiaries of the company also reported improvement in their operating margins (especially Zeppelin Mobiles and Wausaukee Composites). 
• We have fine-tuned our earnings estimate on the back of the improvement witnessed in the margins of Sintex? subsidiaries and the plastic business. Our revised FY2010 and FY2011 EPS estimates now stand at Rs26.1 and Rs29.3 respectively. We expect Sintex? revenues and profits to grow at a compounded annual growth rate (CAGR) of 8% and 10% respectively over FY2009-11E. Further, we have also updated FY2009 audited numbers for the company. 
• We are rolling over our price target to FY2011 valuation multiple and now value the custom moulding, tanks and textile business at 5x its FY2011E EBITDA. Consequently, we have revised our price target to Rs288 and maintain our Buy recommendation on the stock. At the current market price the stock is trading at 9.5x and 8.5x FY2010E and FY2011E earnings respectively.

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MUTUAL FUNDS: WHAT?S IN?WHAT?S OUT

Fund Analysis: October 2009

An analysis has been undertaken on equity and mid-cap funds? portfolios, indicating the favourite picks of fund managers for the month of September 2009. Equity funds comprise of all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 24 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Mid-cap Fund etc.